40.Given the following information, calculate the NPV of a proposed project: Cost = $4,000; estimated life = 3 years; initial decreasein accounts receivable = $1000, which must be restored at the end of the project's life; estimated salvage value = $1,000; net income beforetaxes and depreciation = $2,000 per year; method of depreciation = MACRS; tax rate = 40 percent; required rate of return = 18 percent. a.$1,137b.-$151c.$137d.$804e.$544ANS: E[MACRS table required]Project analysis worksheet:IInitial investment outlay1) Cost($4,000)2) Decrease in NWC1,0003) Total net investment($3,000)IIIncremental operating flows:Year:0 1 2 4) EBT and depreciation2,000$2,000$2,0005) Earnings after taxes (line 4 ×0.6)1,2001,2001,2006) Depreciation (from table)1,3201,8006007) Tax savings from depreciation(5 × 0.429528720240 3
228 Chapter 10 Project Cash Flows and Risk8) Net operating flows(line 5 + 7)$1,728$1,920$1,440IIITerminal cash flow:9) Estimated salvage value$1,00010) Tax on salvage value((1,000 - 280) ×0.4)(288)11) Return of NWC(1,000)12) Net CF($ 288)IVNet cash flows:13) Total net cash flows($3,000)$1,728$1,920$1,152Financial calculator solution:Inputs: = -3000; = 1728; = 1920; = 1152; I = 18.Output: NPV = $544.46 $544. DIF: Medium OBJ: TYPE: Problem TOP: New project NPV 41.Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars' marginal tax rate is 40 percent, and it uses a 12 percent required rate of return to evaluate projects of this nature. If the machine costs $60,000, what is the NPV of the project?
Chapter 10 229 5 DIF: Medium OBJ: TYPE: Problem TOP: New project NPV
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